SMITH & WOLLENSKY RESTAURANT GROUP INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-Q

|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended September 29, 2003

OR

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-16505

-----------

The Smith & Wollensky Restaurant Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware 58 2350980
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)

1114 First Avenue, New York, NY 10021
(Address of principal executive offices) (Zip code)

212-838-2061
(Registrant's telephone number, including area code)

-----------

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|

As of November 13, 2003, the registrant had 9,375,066 shares of Common Stock,
$.01 par value per share, outstanding.

1

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.

INDEX

PART I - FINANCIAL INFORMATION PAGE

Item 1. Financial Statements.

Unaudited Consolidated Balance Sheets as of September 29, 2003 and December 30, 2002 4

Unaudited Consolidated Statements of Operations for the three-and nine-month periods ended
September 29, 2003 and September 30, 2002 5

Unaudited Consolidated Statements of Stockholders' Equity for the nine-month periods ended
September 29, 2003 and September 30, 2002 6

Unaudited Consolidated Statements of Cash Flows for the nine-month periods ended
September 29, 2003 and September 30, 2002 7

Notes to Unaudited Consolidated Financial Statements 8

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 16

Item 3. Quantitative and Qualitative Disclosures about Market Risk. 29

Item 4. Controls and Procedures. 30

PART II - OTHER INFORMATION

Item 1. Legal Proceedings. 30

Item 6. Exhibits and Reports on Form 8-K. 30 - 31

2

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

On one or more occasions, we may make statements in this Quarterly
Report on Form 10-Q regarding our assumptions, projections, expectations,
targets, intentions or beliefs about future events. All statements other than
statements of historical facts, included or incorporated by reference herein
relating to management's current expectations of future financial performance,
continued growth and changes in economic conditions or capital markets are
forward looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

Words or phrases such as "anticipates," "believes," "estimates,"
"expects," "intends," "plans," "predicts," "projects," "targets," "will likely
result," "hopes", "will continue" or similar expressions identify forward
looking statements. Forward-looking statements involve risks and uncertainties,
which could cause actual results or outcomes to differ materially from those
expressed. We caution that while we make such statements in good faith and we
believe such statements are based on reasonable assumptions, including without
limitation, management's examination of historical operating trends, data
contained in records and other data available from third parties, we cannot
assure you that our projections will be achieved. Factors that may cause such
differences include: economic conditions generally and in each of the markets in
which we are located, the amount of sales contributed by new and existing
restaurants, labor costs for our personnel, fluctuations in the cost of food
products, changes in consumer preferences, the level of competition from
existing or new competitors in the high-end segment of the restaurant industry
and our success in implementing our growth strategy.

We have attempted to identify, in context, certain of the factors
that we believe may cause actual future experience and results to differ
materially from our current expectation regarding the relevant matter or subject
area. In addition to the items specifically discussed above, our business,
results of operations and financial position and your investment in our common
stock are subject to the risks and uncertainties described in Exhibit 99.1 of
this Quarterly Report on Form 10-Q.

From time to time, oral or written forward-looking statements are
also included in our reports on Forms 10-K, 10-Q and 8-K, our Schedule 14A, our
press releases and other materials released to the public. Although we believe
that at the time made, the expectations reflected in all of these
forward-looking statements are and will be reasonable, any or all of the
forward-looking statements in this Quarterly Report on Form 10-Q, our other
reports on Forms 10-K, 10-Q and 8-K, our Schedule 14A and any other public
statements that are made by us may prove to be incorrect. This may occur as a
result of inaccurate assumptions or as a consequence of known or unknown risks
and uncertainties. Many factors discussed in this Quarterly Report on Form 10-Q,
certain of which are beyond our control, will be important in determining our
future performance. Consequently, actual results may differ materially from
those that might be anticipated from forward-looking statements. In light of
these and other uncertainties, you should not regard the inclusion of a
forward-looking statement in this Quarterly Report on Form 10-Q or other public
communications that we might make as a representation by us that our plans and
objectives will be achieved, and you should not place undue reliance on such
forward-looking statements.

We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. However, your attention is directed to any further
disclosures made on related subjects in our subsequent periodic reports filed
with the Securities and Exchange Commission on Forms 10-K, 10-Q and 8-K and
Schedule 14A.

Unless the context requires otherwise, references to "we," "us,"
"our," "SWRG" and the "Company" refer specifically to The Smith & Wollensky
Restaurant Group, Inc. and its subsidiaries and predecessor entities.

3

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
AND SUBSIDIARIES
Unaudited Consolidated Balance Sheets
(dollar amounts in thousands, except per share data)

September 29, December 30,
2003 2002
---- ----

Assets
Current assets:
Cash and cash equivalents................................................................... $ 1,826 $ 4,158
Short-term investments...................................................................... 750 3,636
Accounts receivable, less allowance for doubtful accounts of $55
at September 29, 2003 and December 30, 2002, respectively................................... 3,913 2,261
Merchandise inventory....................................................................... 4,002 3,578
Prepaid expenses and other current assets................................................... 1,070 1,465
-------- --------

Total current assets........................................................................ 11,561 15,098

Property and equipment, net.................................................................... 59,239 46,693
Goodwill, net.................................................................................. 6,886 6,886
Licensing agreement, net....................................................................... 3,375 3,258
Management contract, net....................................................................... 754 829
Long-term investments.......................................................................... 1,277 1,684
Other assets................................................................................... 3,552 3,407
-------- --------
Total assets................................................................................ $ 86,644 $ 77,855
======== ========

Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt.......................................................... $ 1,586 $ 1,157
Current portion of obligation under capital lease.......................................... 659 _
Accounts payable and accrued expenses...................................................... 9,981 8,851
-------- --------
Total current liabilities.................................................................. 12,226 10,008
Obligations under capital lease............................................................... 9,297 _
Long-term debt, net of current portion........................................................ 6,808 8,232
Deferred rent................................................................................. 5,135 5,209
-------- --------
Total liabilities.......................................................................... 33,466 23,449
Stockholders' equity:
Common stock (par value $.01; authorized 40,000,000 shares; 9,375,066 and 9,354,266 shares
issued and outstanding at September 29, 2003 and December 30, 2002, respectively).......... 94 94
Additional paid-in capital................................................................. 69,935 69,854
Accumulated deficit........................................................................ (16,848) (15,491)
Accumulated other comprehensive loss....................................................... (3) (51)
-------- --------
53,178 54,406
-------- --------

Commitments and contingencies
Total liabilities and stockholders' equity................................................. $ 86,644 $ 77,855
======== ========

See accompanying notes to unaudited consolidated financial statements.

4

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
(dollar amounts in thousands, except per share amounts)

Three Months Ended Nine Months Ended
September 29, September 30, September 29, September 30,
2003 2002 2003 2002
---- ---- ---- ----

Owned restaurant sales ................................ $ 21,073 $ 17,213 $ 67,744 $ 55,455
----------- ----------- ----------- -----------
Cost of owned restaurant sales:
Food and beverage costs ............................ 6,639 5,047 21,020 16,015
Salaries and related benefit expenses .............. 6,523 5,793 19,509 16,946
Restaurant operating expenses ...................... 3,888 3,021 11,340 8,750
Occupancy and related expenses ..................... 1,026 1,527 3,607 4,378
Marketing and promotional expenses ................. 988 777 2,820 2,310
Depreciation and amortization expenses ............. 944 856 2,789 2,464
----------- ----------- ----------- -----------
Total cost of owned restaurant sales ............ 20,008 17,021 61,085 50,863
----------- ----------- ----------- -----------

Income from owned restaurant operations ............... 1,065 192 6,659 4,592
Management fee income ................................. 331 502 1,343 1,764
Charge for investment in managed restaurants .......... -- (722) -- (722)
----------- ----------- ----------- -----------
Income (loss) from owned and managed restaurants....... 1,396 (28) 8,002 5,634

General and administrative expenses ................... 2,302 2,489 7,438 7,273
Royalty expense ....................................... 329 250 1,046 784
----------- ----------- ----------- -----------
Operating loss ........................................ (1,235) (2,767) (482) (2,423)

Interest expense ...................................... (362) (73) (765) (149)
Amortization of deferred debt financing costs ......... (13) _ (39) _
Interest income ....................................... 15 57 89 141
----------- ----------- ----------- -----------
Interest expense, net ................................. (360) (16) (715) (8)
----------- ----------- ----------- -----------
Loss before provision for income taxes ................ (1,595) (2,783) (1,197) (2,431)
Provision for income taxes ............................ 35 56 160 157
----------- ----------- ----------- -----------

Net loss .............................................. $ (1,630) $ (2,839) $ (1,357) $ (2,588)
=========== =========== ============ ============

Net loss per common share basic and diluted: .......... $ (0.17) $ (0.30) $ (0.14) $ (0.28)
=========== =========== ============ ============

Weighted average common shares outstanding:
Basic and diluted ..................................... 9,371,907 9,354,266 9,360,212 9,354,266
========= ========= ========= =========

See accompanying notes to unaudited consolidated financial statements.

5

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
AND SUBSIDIARIES
Unaudited Consolidated Statements of Stockholders' Equity
(dollar amounts in thousands)
Nine months ended September 29, 2003 and September 30, 2002

Accumulated
Common Stock Additional other
------------ paid-in Accumulated comprehensive Stockholders'
Shares Amount capital deficit income (loss) equity
-------- ------ ------- ------- ------------- ------

Balance at December 31, 2001 9,354,266 $94 $69,854 $(13,364) $ -- $56,584

Net loss -- -- -- (2,588) -- (2,588)
--------- --- ------- --------- ------- -------

Balance at September 30, 2002 9,354,266 $94 $69,854 $(15,952) $ -- $53,996
========= === ======= ========= ======= =======

Balance at December 30, 2002 9,354,266 $94 $69,854 $(15,491) $(51) $54,406

Stock options exercised 20,800 -- 81 81

Unrealized gain on investments 48 48

Net loss -- -- -- (1,357) -- (1,357)
--------- --- ------- --------- ------ -------

Total comprehensive loss (1,309)
=======

Balance at September 29, 2003 9,375,066 $94 $69,935 $(16,848) $(3) $53,178
========= === ======= ======== === =======

See accompanying notes to unaudited consolidated financial statements.

6

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(dollar amounts in thousands)

Nine months ended September 29, 2003 and September 30, 2002

September 29, September 30,
2003 2002
---- ----

Cash flows from operating activities:
Net loss $ (1,357) $ (2,588)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization......................................................... 3,086 2,766
Amortization of deferred debt financing costs...................................... 39 -
Charge for investment in managed restaurants..................................... - 722
Accretive interest on capital lease obligation....................................... 59 -
Changes in operating assets and liabilities:
Accounts receivable................................................................ (1,652) 88
Merchandise inventory.............................................................. (424) (551)
Prepaid expenses and other current assets.......................................... 395 1
Other assets....................................................................... (96) (254)
Accounts payable and accrued expenses.............................................. 1,130 69
Deferred rent...................................................................... (87) 187
---------- ------------

Net cash provided by operating activities................................. 1,093 440

Cash flows from investing activities:
Purchase of property and equipment...................................................... (5,494) (3,597)
Purchase of nondepreciable assets....................................................... (134) (216)
Purchase of investments................................................................. (3,319) (5,620)
Proceeds from sale of investments....................................................... 6,660 2,376
Payments under licensing agreement...................................................... (224) (219)
---------- ------------

Cash flows used in investing activities................................... (2,511) (7,276)

Cash flows from financing activities:
Proceeds from issuance of long-term debt................................................. - 4,000
Principal payments of long-term debt..................................................... (995) (195)
Proceeds from options exercised...................................................... 81 -
---------- ------------
Cash flows provided by (used in) financing activities..................... (914) 3,805
---------- ------------
Net change in cash and cash equivalents.................................................. (2,332) (3,031)
Cash and cash equivalents at beginning of period......................................... 4,158 4,561
----- -----
Cash and cash equivalents at end of period................................ $ 1,826 $ 1,530
======== =========

Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest.................................................................. $ 611 $ 121
======== =========
Income taxes.............................................................. $ 126 $ 228
======== =========

Noncash investing and financing activities:
Purchase of land $9,898 $ -
====== =======
Obligations under capital lease $9,956 $ -
====== =======

See accompanying notes to unaudited consolidated financial statements.

7

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.
AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts and where noted)
September 29, 2003 and September 30, 2002

(1) General

The accompanying unaudited consolidated financial statements of The Smith &
Wollensky Restaurant Group, Inc. and its wholly-owned subsidiaries
(collectively, "SWRG") do not include all information and footnotes normally
included in financial statements prepared in conformity with accounting
principles generally accepted in the United States. In the opinion of
management, the unaudited consolidated financial statements for the interim
periods presented reflect all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the financial position and
results of operations as of and for such periods indicated. These unaudited
consolidated financial statements and related notes should be read in
conjunction with the audited consolidated financial statements of SWRG for the
fiscal year ended December 30, 2002 filed by SWRG on Form 10-K with the
Securities and Exchange Commission on March 31, 2003. Results for the interim
periods presented herein are not necessarily indicative of the results, which
may be reported for any other interim period or for the entire fiscal year.

The consolidated balance sheet data presented herein for December 30, 2002
was derived from SWRG's audited consolidated financial statements for the fiscal
year then ended, but does not include all disclosures required by accounting
principles generally accepted in the United States. The preparation of unaudited
financial statements in accordance with accounting principles generally accepted
in the United States requires SWRG to make certain estimates and assumptions for
the reporting periods covered by the financial statements. These estimates and
assumptions affect the reported amounts of assets, liabilities, revenues and
expenses during the reporting period. Actual results could differ from these
estimates.

SWRG utilizes a 52- or 53-week reporting period ending on the Monday
nearest to December 31st. The three months ended September 29, 2003 and
September 30, 2002 represent 13-week reporting periods and the nine months ended
September 29, 2003 and September 30, 2002 represent 39-week reporting periods.
SWRG develops, owns, operates and manages a diversified portfolio of upscale
tablecloth restaurants. At September 29, 2003, SWRG owned and operated eleven
restaurants, including eight Smith & Wollensky restaurants. The newest
restaurant, a 400 seat Smith & Wollensky in Dallas, Texas, opened on March 17,
2003. SWRG also manages five restaurants.

(2) Effect of New Accounting Standards

In April 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 145, Rescission
of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. SFAS No. 145 amends existing guidance on reporting gains
and losses on the extinguishment of debt to prohibit the classification of the
gain or loss as extraordinary, as the use of such extinguishments have become
part of the risk management strategy of many companies. SFAS No. 145 also amends
SFAS No. 13 to require sale-leaseback accounting for certain lease modifications
that have economic effects similar to sale-leaseback transactions. The
provisions of the Statement related to the rescission of Statement No. 4 is
applied in fiscal years beginning after May 15, 2002. The provisions of the
Statement related to Statement No. 13 were effective for transactions occurring
after May 15, 2002. The implementation of this standard had no material impact
on SWRG's results of operations.

In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The disclosure requirements are effective for financial
statements of interim and annual periods ending after December 31, 2002. The
initial recognition and measurement

8

provisions of the Interpretation are applicable to guarantees issued or modified
after December 31, 2002 and had no material effect on SWRG's financial
statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation Transition and Disclosure, an amendment of FASB
Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. SWRG accounts for stock-based compensation using the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. SWRG has adopted the pro forma
disclosure requirements of SFAS No. 123, Accounting for Stock-Based
Compensation. The following table illustrates the effect on the net loss as if
SWRG had applied the fair value recognition provisions of SFAS No. 123 to stock
based compensation:

Three Months Ended Nine Months Ended
------------------ -----------------
September September September September
29, 30, 29, 30,
2003 2002 2003 2002
---- ---- ---- ----

Net loss, as reported $ (1,630) (2,839) (1,357) (2,588)
Add stock-based employee compensation
expense included in reported net income 12 22 36
Deduct total stock-based employee
compensation expense determined under
fair value based method (218) (480)
------------- ---------------------------- -------------
Pro forma net loss $ (1,848) (2,827) (1,815) (2,552)
======= ======= ======= =======

Per common share - basic and diluted

Pro forma net loss $ (0.20) (0.30) (0.19) (0.27)
======== ======== ======== ======

Weighted average common shares
outstanding:

Basic and diluted 9,371,907 9,354,266 9,360,212 9,354,266
========= ========= ========= =========

In January 2003, the FASB issued Interpretation No.46, Consolidation
of Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51. This Interpretation addresses the consolidation by business enterprises
of variable interest entities as defined in the Interpretation. The
Interpretation applies immediately to variable interests in variable interest
entities created after January 31, 2003, and to variable interests in variable
interest entities obtained after January 31, 2003. For enterprises, such as
SWRG, with a variable interest in such entities created before February 1, 2003,
the Interpretation is applied to the enterprise at the end of interim or annual
periods ending after December 15, 2003. An entity shall be subject to
consolidation according to the provisions of this Interpretation if, by design,
the following conditions exists - As a group the holders of the equity
investment at risk lack any one of the following three characteristics of a
controlling financial interest: (1) the direct or indirect ability to make
decisions about an entity's activities through voting rights or similar rights;
(2) the obligation to absorb the expected losses of the entity if they occur; or
(3) the right to receive the expected residual returns of the entity if they
occur. SWRG is currently evaluating the impact of the application of this
Interpretation and the effect it may have on SWRG's financial statements. SWRG
believes that at least one of its managed restaurants, which is owned by a
separate partnership, could be considered a variable interest entity that may
need to be consolidated. SWRG believes that if such entity were to be
consolidated, this entity would gross up its consolidated sales by approximately
$6.8 million and its restaurant operating costs by approximately $6.3 million
for the nine months ended September 29, 2003, but the impact on SWRG's net
income would not be material.

9

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. This
statement requires instruments that are mandatorily redeemable, among other
financial instruments, which embody an unconditional obligation requiring the
issuer to redeem them by transferring its assets at a specified or determinable
date or upon an event that is certain to occur, be classified as liabilities.
Certain provisions of this statement became effective for financial instruments
entered into or modified after May 31, 2003 and was effective at the beginning
of the first interim period beginning after June 15, 2003. The implementation of
the provisions that became effective had no material impact on SWRG's financial
statements. Through the staff position issued on November 7, 2003, the FASB
deferred application of several provisions of SFAS No. 150 for specified
mandatorily redeemable noncontrolling interests of all entities and for the
classification and measurement provisions for such interests. The staff position
also deferred measurement provisions for mandatorily noncontrolling interests
that are redeemable prior to liquidation or termination of the subsidiary and
that were issued before November 5, 2003. We believe that the implementation of
the deferred provisions will not have a material impact on SWRG's financial
statements.

(3) Net Loss per Common Share

SWRG calculates net loss per common share in accordance with SFAS No.
128, Earnings Per Share. Basic net loss per common share is computed by dividing
the net loss by the weighted average number of common shares outstanding.
Diluted net loss per common share assumes the exercise of stock options using
the treasury stock method, if dilutive. Dilutive net loss per common share for
the three- and nine- months ended September 29, 2003 and September 30, 2002,
respectively, was the same as basic net loss per common share.

The following table sets forth the calculation for net loss per
common share on a weighted average basis:

Three Months Ended Nine Months Ended
September 29, September 30, September 29, September 30,
2003 2002 2003 2002
---- ---- ---- ----

Numerator:

Net loss $ (1,630) $ (2,839) $ (1,357) $ (2,588)
========= ========= ========= =========

Weighted Weighted Weighted Weighted
-------- -------- -------- --------
Total Average Average Average Average
----- ------- ------- ------- -------
Shares Shares Shares Shares Shares
------ ------ ------ ------ ------

Denominator:

Beginning common shares 9,354,266 9,354,266 9,354,266 9,354,266 9,354,266
Options exercised during the nine months ended
September 29, 2003 20,800 17,641 -- 5,946 --
--------- --------- --------- --------- ---------
Basic and diluted.................................. 9,375,066 9,371,907 9,354,266 9,360,212 9,354,266
========= ========= ========= ========= =========

10

Per common share-basic and diluted:

Net loss $ (0.17) $ (0.30) $ (0.14) $ (0.28)
========= ========= ========= =========

The Company excluded options to purchase approximately 641,000 and
126,000 shares of common stock for the three-months ended September 29, 2003 and
September 30, 2002, respectively, and approximately 419,000 and 91,000 shares of
common stock for the nine-months ended September 29, 2003 and September 30,
2002, respectively, because they are considered anti-dilutive.

(4) Licensing Agreements

On August 16, 1996, SWRG entered into a Licensing Agreement with St.
James Associates ("St. James"), the owner of the Smith & Wollensky restaurant in
New York. St. James is an entity related through common management and
ownership.

The Licensing Agreement provides SWRG with the exclusive right to
utilize the names "Smith & Wollensky" and "Wollensky's Grill" ("Names")
throughout the United States and internationally, with the exception of a
reserved territory, as defined. Consequently, SWRG may not open additional Smith
& Wollensky restaurants or otherwise utilize the Names in the reserved
territory. The Licensing Agreement requires SWRG to make additional payments to
St. James as follows: (i) $200 for each new restaurant opened (increasing
annually commencing in 1999 by the lesser of the annual increase in the Consumer
Price Index or a 5% increase of the fee required in the preceding year), (ii) a
royalty fee of 2% based upon annual gross sales for each restaurant utilizing
the Names, as defined, subject to certain annual minimums, and (iii) a royalty
fee of 1% of annual gross sales for any steakhouses opened in the future by SWRG
that do not utilize the Names. In addition, should SWRG terminate or default on
the license, as defined, it is subject to a fee of $2,000 upon termination or
$2,500 to be paid over four years.

The future minimum royalty payments as of September 29, 2003 relating
to (ii) and (iii) above are as follows:

Fiscal year:
- ------------
2003 $ -
2004 800
2005 800
2006 800
2007 800
2008 and each year thereafter....................................... 800

During the nine-month period ended September 29, 2003, SWRG paid $224
in connection with the opening of the Smith & Wollensky unit in Dallas, Texas.

(5) Management Agreements

Prior to December 2002, SWRG operated Park Avenue Cafe in Chicago,
Mrs. Park's Tavern and the other services of the food and beverage department of
the Doubletree Hotel in Chicago ("Doubletree") pursuant to a sub-management
agreement (the "Doubletree Agreement"). SWRG received a management fee equal to
the sum of 1.5% of sales and a percentage of earnings, as defined. The
Doubletree Agreement was to expire on the earlier of December 31, 2004 or the
termination of the related hotel management agreement between Chicago HSR
Limited Partnership ("HSR"), the owner of the Doubletree and Doubletree
Partners, the manager of the Doubletree. During December 2002, HSR closed the
Park Avenue Cafe restaurant in Chicago and discontinued SWRG's requirement to
provide other food and beverage department service for the Doubletree. As a
result, SWRG is no longer receiving the fees described

11

above. During the three-month period ended March 31, 2003, SWRG reached an
agreement with HSR. The agreement provides for the continued use by HSR of the
name Mrs. Parks Tavern and requires SWRG to provide management services to
support that location. In exchange for the use of the Mrs. Park's Tavern name
and related management support SWRG receives an annual fee of $50. The agreement
will automatically renew each year, unless notification of cancellation is
given, by either party, at least 90 days prior to December 31.

(6) Long-Term Debt

Long-term debt consists of the following:

September 29, December 30,
2003 2002
---- ----

Term loan(a)..................................... $3,867 $4,000
Term loan(b)..................................... 1,757 1,900
Promissory note(c)............................... 1,100 1,650
Other(d)......................................... 1,670 1,839
------ ------
8,394 9,389
Less current portion............................. 1,586 1,157
-------- --------
$6,808 $8,232
====== ======

- -----------

a. On August 23, 2002, SWRG entered into a $14.0 million secured term
loan agreement with Morgan Stanley Dean Witter Commercial Financial
Services, Inc. ("Morgan Stanley"). Under the agreement, SWRG is the
guarantor of borrowings by its wholly owned subsidiary, S&W Las
Vegas, LLC ("Borrower"). SWRG, through the Borrower, borrowed $4.0
million under the agreement for general corporate purposes, including
its new restaurant development program. This portion of the loan
bears interest at a fixed rate of 6.35% per annum. Principal payments
for this portion of the loan commenced June 30, 2003. Pursuant to the
terms of the loan agreement, SWRG is obligated to make monthly
principal payments of approximately $33 for this portion of the loan
over the term of the loan and a balloon payment of approximately
$2,033 on May 31, 2008, the maturity date of the loan. The term loan
is secured by a leasehold mortgage relating to the Las Vegas property
and all of the personal property and fixtures of S&W Las Vegas, LLC.
As previously disclosed, the balance of the funds available under the
agreement had been intended to be used by SWRG to exercise its
purchase option for the land and building at 3767 Las Vegas Blvd.
where SWRG operates its 675-seat, 30,000 square foot restaurant. The
ability to draw down this balance expired on May 31, 2003. SWRG did
not draw down the remaining balance because, as an alternative to
purchasing the land, SWRG signed an amendment to its lease agreement,
as discussed in Note 7. As a result of not drawing on the additional
$10.0 million previously available to SWRG under the $14.0 million
secured term loan agreement, on September 28, 2003, Morgan Stanley
amended, among other things, the interest coverage ratio covenant of
the term loan agreement. The costs in connection with the amendment
were not material. At September 29, 2003 SWRG was in compliance with
all the financial covenants contained in this amended loan agreement.

b. On December 24, 2002, SWRG entered into a $1.9 million secured term
loan agreement with Morgan Stanley. Under the agreement, SWRG and
Dallas S&W L.P., a wholly owned subsidiary of SWRG, are the
guarantors of borrowings by the Borrower. Of the $1.9 million
borrowed by SWRG, through the Borrower, under the agreement, $1.35
million was used for its new restaurant development program, and $550
was used for the first principal installment on the $1.65 million
promissory note with Toll Road Texas Land Company, L.P. described
below. This loan bears interest at a fixed rate of 6.36% per annum.
Principal payments for this loan commenced January 24, 2003. Pursuant
to the terms of the loan agreement, SWRG is obligated to make monthly
principal payments of $16 for this loan over the term of the loan and
a balloon payment of approximately $966 on December 24, 2007, the
maturity date of the loan. The term loan is secured by a

12

second mortgage relating to the Dallas property and a security
interest in all of the personal property and fixtures of Dallas S&W
L.P. The term loan is also secured by the leasehold mortgage relating
to the Las Vegas property. On September 28, 2003, Morgan Stanley
amended, among other things, the interest coverage ratio covenant of
the term loan agreement. The costs in connection with the amendment
were not material. At September 29, 2003 SWRG was in compliance with
all the financial covenants contained in the amended loan agreement.

c. On October 9, 2002, SWRG purchased the property for the Smith &
Wollensky unit in Dallas. The purchase price for this property was
$3.75 million. A portion of the purchase price for this property was
financed through a $1.65 million promissory note that was signed by
Dallas S&W, L.P., a wholly owned subsidiary of SWRG. This loan bears
interest at 8% per annum and requires annual principal payments of
$550 with the first installment being prepaid on March 4, 2003, and
the subsequent two installments due on October 9, 2004 and October 9,
2005, respectively. The promissory note is secured by a first
mortgage relating to the Dallas property.

d. In fiscal 1997, SWRG assumed certain liabilities in connection with
the acquisition of leasehold rights relating to its Smith & Wollensky
Miami location from two bankrupt corporations. Pursuant to the terms
of the bankruptcy resolution, SWRG is obligated to make quarterly and
annual payments over a six-year period. These obligations generally
bear interest at rates ranging from 9% to 12%. The aggregate balance
outstanding at September 29, 2003 and December 30, 2002 was $5 and
$110, respectively. In addition, SWRG assumed a mortgage on the
property that requires monthly payments, with a final principal
payment of $911 in June 2004. The mortgage bears interest at 5.75%.
SWRG also assumed a loan payable to a financing institution that
requires monthly payments through the year 2014, and bears interest
at 7.67%. The aggregate balance of the mortgage and loan payable
outstanding at September 29, 2003 and December 30, 2002 was $1,665
and $1,729, respectively.

(7) Capital Lease Obligation

On April 29, 2003, SWRG signed a second amendment to its lease
agreement (the "Agreement") with The Somphone Limited Partnership ("Lessor"),
the owner of the property for the Las Vegas restaurant. The Agreement, which is
being treated as a capital lease, adjusts the annual fixed payment to $400 per
year from May 1, 2003 to April 30, 2008 and to $860 per year from May 1, 2008 to
April 30, 2018. The Agreement also amends the amount of the purchase price
option available to SWRG effective May 1, 2003. SWRG will have the option to
purchase the property over the next five years at an escalating purchase price.
The purchase price is approximately $10.0 million at May 1, 2003, and escalates
to approximately $12.1 million by the fifth year. SWRG is required to make down
payments on the purchase price of the property. Those payments, which escalate
annually, are payable in monthly installments into a collateralized sinking fund
based on the table below, and will be applied against the purchase price at the
closing of the option. If at the end of the five years SWRG does not exercise
the option, the Lessor receives the down payments that accumulated in the
sinking fund, and thereafter the purchase price for the property would equal
$10.5 million. The down payments for the purchase of the land over the next five
years as of September 29, 2003 will be as follows:

Fiscal year
-----------
2003 $ 63
2004 269
2005 298
2006 328
2007 360
Thereafter 123
---
$1,441
======

If SWRG exercises the option, the Lessor is obligated to provide SWRG with
financing in the amount of the purchase price applicable at the time of the
closing, less the down payment payable by SWRG, at an interest rate of 8% per
annum, payable over ten years.

13

The Agreement also provides the Lessor with a put right that would give the
Lessor the ability to require SWRG to purchase the property at any time after
June 15, 2008 at the then applicable purchase price. In the event of the
exercise of the put option, the Lessor is obligated to provide SWRG with
financing in the amount of the purchase price applicable at that time. SWRG will
then have two months to close on the purchase of the property.

On May 14, 2003, a letter was signed by Morgan Stanley confirming that the
treatment of the Agreement as a capital lease does not violate the debt
restriction covenant of the secured term loan agreement and that the capital
lease and any imputed interest related to the capital lease are excluded from
the calculation of the financial covenants.

(8) Common Stock

The 2001 Stock Incentive Plan ("2001 Stock Incentive Plan") provides
for the granting of options to purchase shares of our Common Stock and stock
awards. Options may be incentive stock options, as defined in Section 422 of the
Internal Revenue Code (the "Code"), granted only to our employees (including
officers who are also employees) or non-qualified stock options granted to our
employees, directors, officers and consultants. Stock awards may be granted to
employees of, and other key individuals engaged to provide services to, SWRG and
its subsidiaries. The 2001 Stock Incentive Plan was adopted and approved by our
directors in March 2001 and our stockholders in April 2001.

The 2001 Stock Incentive Plan may be administered by our Board of
Directors or by our Compensation Committee, either of which may decide who will
receive stock option or stock awards, the amount of the awards, and the terms
and conditions associated with the awards. These include the price at which
stock options may be exercised, the conditions for vesting or accelerated
vesting, acceptable methods for paying for shares, the effect of corporate
transactions or changes in control, and the events triggering expiration or
forfeiture of a participant's rights. The maximum term for stock options may not
exceed ten years, provided that no incentive stock options may be granted to any
employee who owns ten percent or more of SWRG with a term exceeding five years.

The maximum number of shares of Common Stock available for issuance
under the 2001 Stock Incentive Plan is 583,333 shares, increased by 4% of the
total number of issued and outstanding shares of Common Stock (including shares
held in treasury) as of the close of business on December 31 of the preceding
year on each January 1, beginning with January 1, 2002, during the term of the
2001 Stock Incentive Plan. However, the number of shares available for all
grants under the 2001 Stock Incentive Plan is limited to 11% of SWRG's issued
and outstanding shares of capital stock on a fully-diluted basis. Accordingly,
the maximum number of shares of Common Stock available for issuance in 2003 is
382,800 shares. In addition options may not be granted to any individual with
respect to more than 500,000 total shares of Common Stock in any single taxable
year (taking into account options that were terminated, repriced, or otherwise
adjusted during such taxable year).

The 2001 Stock Incentive Plan provides that proportionate adjustments
shall be made to the number of authorized shares which may be granted under the
2001 Stock Incentive Plan and as to which outstanding options, or portions of
outstanding options, then unexercised shall be exercisable as a result of
increases or decreases in SWRG's outstanding shares of common stock due to
reorganization, merger, consolidation, recapitalization, reclassification, stock
split-up, combination of shares, or dividends payable in capital stock, such
that the proportionate interest of the option holder shall be maintained as
before the occurrence of such event. Upon the sale or conveyance to another
entity of all or substantially all of the property and assets of SWRG, including
by way of a merger or consolidation or a Change in Control of SWRG, as defined
in the 2001 Stock Incentive Plan, our Board of Directors shall have the power
and the right to accelerate the exercisability of any options.

Unless sooner terminated by our Board of Directors, the 2001 Stock
Incentive Plan will terminate on April 30, 2011, ten years from the date on
which the 2001 Stock Incentive Plan was adopted by our Board of Directors All
options granted under the 2001 Stock Incentive Plan shall terminate immediately
prior to the dissolution or liquidation of SWRG; provided, that prior to such
dissolution or liquidation, the vesting of any option shall automatically
accelerate as if such dissolution or liquidation is deemed a Change of Control,
as defined in the 2001 Stock Incentive Plan.

On September 5, 2002 SWRG granted options pursuant to an option
exchange program (the "Option Exchange Program") that SWRG initiated in February
2002 in order to allow employees, officers and directors to cancel all or some
stock options to purchase its common stock having an exercise price greater than
$5.70 per share granted under its 1996 Stock Option Plan, its 1997 Stock Option
Plan and its 2001 Stock Incentive Plan in exchange for new options granted under
the 2001 Stock Incentive Plan. Under the Option Exchange

14

Program, the new options were issued on September 5, 2002 with an exercise price
of $3.88. The exercise price of each option received under the exchange program
equaled 100% of the price of SWRG's common stock on the date of grant of the new
options, determined in accordance with the terms of the 2001 Stock Incentive
Plan. An employee received options under the exchange program with an exercise
price of $4.27, or 110% of the fair market value of SWRG's common stock on the
date of grant. The new options vest over periods ranging from four months to
five years, in accordance with the vesting schedule of the cancelled options.
SWRG structured the Option Exchange Program in a manner that did not result in
any additional compensation charges or variable award accounting. As of December
30, 2002, options to purchase 726,033 shares of common stock remained
outstanding under the 2001 Stock Incentive Plan.

In June and July 2003, SWRG granted options to purchase 127,000
shares of common stock under the 2001 Stock Incentive Plan. The weighted average
exercise price of the options granted was $5.05 per share, the estimated fair
market value of the underlying common shares at the date of grant. Each option
granted in June and July 2003 will vest over a period of five years. As of
September 29, 2003, options to purchase 759,866 shares of common stock were
outstanding under the 2001 Stock Incentive Plan.

Activity relating to SWRG's option plans was as follows:

Number
of shares of Weighted average
common stock exercise price
covered by per share of
options common stock
------- ------------

Options outstanding at December 31, 2001............................... 728,016 $ 7.97
Option exchange program - cancelled.................................... (445,800) 9.39
Option exchange program - issued....................................... 445,800 3.97
Options granted during the year ended December 30, 2002................ 8,900 3.88
Options forfeited during the year ended December 30, 2002.............. (10,883) 5.47
-------- ----

Options outstanding at December 30, 2002............................... 726,033 4.56
Options forfeited during the nine-months ended September 29, 2003...... (72,367) 5.47
Options granted during the nine-months ended September 29, 2003........ 127,000 5.05
Options exercised during the nine-months ended September 29, 2003...... (20,800) 3.88
---------- ------
Options outstanding at September 29, 2003.............................. 759,866 $4.56
========== ======

As of September 29, 2003 the weighted average remaining contractual
life of options outstanding was seven years. As of September 29, 2003, there
were options covering approximately 328,000 shares of common stock exercisable
at a range of $3.88 to $5.70 per share.

(9) Legal Matters

On or about September 5, 2001, Mondo's of Scottsdale, L.C. filed a
suit against SWRG alleging that SWRG had entered into an agreement to purchase
all of the leasehold interest in, and certain fixtures and equipment located at,
Mondo's restaurant located in Scottsdale, Arizona. The suit was filed in the
Superior Court of the State of Arizona in and for the County of Maricopa and has
been set to go to jury trial in March 2004. The plaintiff requested damages of
approximately $2.0 million. SWRG is vigorously contesting this suit. Management
believes, based on advice from local counsel, that SWRG has a significant
likelihood of prevailing in the suit and that the risk of loss is not probable.
Accordingly, SWRG has not established a reserve for loss in connection with this
suit. If SWRG were to lose the suit, the financial position, results of
operation and cash flows of SWRG may be adversely affected.

15

SWRG is involved in various other claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on SWRG's
consolidated financial position, results of operations or liquidity.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

General

As of September 29, 2003, we operated 16 high-end, high volume
restaurants in the United States. We believe that the size of each market we
entered warranted investment in restaurants with seating capacities ranging from
290 to 675. The opening of our next Smith & Wollensky, which will be located in
Houston, Texas, is expected to occur in the first quarter of 2004. The opening
date was moved back from the fourth quarter of 2003 due to the additional cost
and hiring difficulties associated with opening a restaurant during the holiday
season. We expect the restaurant in Houston to have approximately 400 seats on
two levels. We also expect to open another new Smith & Wollensky in Boston in
the third quarter of 2004. We expect the restaurant in Boston to have
approximately 400 seats on four levels. Although we expect to open one to two
restaurants per year starting in 2005, we plan to move ahead cautiously with our
future expansion, as management evaluates and monitors economic and national
security conditions and available capital generated internally and from outside
sources. We expect additional locations to have seating capacities ranging from
375 to 450 seats, but would consider locations with larger seating capacities
where appropriate. We believe these new restaurants will require, on average, a
total cash investment of $2.0 million to $5.0 million net of landlord
contributions and excluding pre-opening expenses. This range assumes that the
property on which the new unit is located is being leased.

As a result of our recent expansion, period-to-period comparisons of
our financial results may be less meaningful. When a new restaurant opens, we
typically incur higher than normal levels of food and labor costs as a
percentage of sales during the first year of its operation. In calculating
comparable restaurant sales, we introduce a restaurant into our comparable
quarterly restaurant base once it has been in operation for 15 months.

Pursuant to management contracts and arrangements, we operate, but do
not own, the original Smith & Wollensky, Maloney & Porcelli, The Post House and
ONEc.p.s. restaurants in New York and Mrs. Parks Tavern in Chicago.

Owned restaurant sales include gross sales less sales taxes and other
discounts. Cost of owned restaurant sales include food and beverage costs,
salaries and related benefits, restaurant operating expenses, occupancy and
related expenses, marketing and promotional expenses and restaurant level
depreciation and amortization. Salaries and related benefits include components
of restaurant labor, including direct hourly and management wages, bonuses,
fringe benefits and related payroll taxes. Restaurant operating expenses include
operating supplies, utilities, maintenance and repairs and other operating
expenses. Occupancy and related expenses include rent, real estate taxes and
other occupancy costs.

Management fee income relates to fees that we receive from our
managed units. These fees are primarily based on a percentage of sales from the
managed units, ranging from 2.3% to 6.0%. Management fee income also includes
fees from Maloney & Porcelli equal to 50% of the unit's net operating cash flow
generated during each fiscal year, provided that the Maloney & Porcelli owner
receives a minimum amount of operating cash flow per year ranging from $360,000
to $480,000. Prior to December 2002, we operated Park Avenue Cafe in Chicago,
Mrs. Park's Tavern and the other services of the food and beverage department of
the Doubletree Hotel in Chicago ("Doubletree") pursuant to a sub-management
agreement (the "Doubletree Agreement"). We received a management fee equal to
the sum of 1.5% of sales and a percentage of earnings, as defined. The
Doubletree Agreement was to expire on the earlier of December 31, 2004 or the
termination of the related hotel management agreement between Chicago HSR
Limited Partnership ("HSR"), the owner of the Doubletree and Doubletree
Partners, the manager of the Doubletree. During December 2002, HSR closed the
Park Avenue Cafe restaurant in Chicago and discontinued our requirement to
provide other food and beverage department service for the Doubletree. As a
result, we no longer receive the fees described above. During the three-month
period ended March 31, 2003, we reached an agreement with HSR. The agreement
provides for the continued use by HSR of the name Mrs. Parks Tavern and requires
us to

16

provide management services to support that location. In exchange for the use of
the Mrs. Park's Tavern name and related management support the Company receives
an annual fee of $50,000. The agreement will automatically renew each year,
unless notification of cancellation is given, by either party, at least 90 days
prior to December 31. Management fee income also includes fees from ONEc.p.s.
equal to 40% of the restaurant's operating cash flows, as reduced by the
repayment of project costs and working capital contributions. After all the
project costs and working capital contributions have been repaid, the fee will
increase to 50% of the restaurant's operating cash flows.

General and administrative expenses include all corporate and
administrative functions that support existing owned and managed operations and
provide infrastructure to facilitate our growth. General and administrative
expenses are comprised of management, supervisory and staff salaries and
employee benefits, travel costs, information systems, training costs, corporate
rent, corporate insurance and professional and consulting fees. Certain
pre-opening costs incurred in connection with the opening of new restaurants are
expensed as incurred and are included in general and administrative expenses.
General and administrative expenses also include the depreciation of
corporate-level property and equipment and the amortization of corporate
intangible assets, such as licensing agreements and management contracts.

Royalty expense represents fees paid pursuant to the terms of the
licensing agreement with St. James Associates, based upon 2.0% of sales, as
defined, for restaurants utilizing the Smith & Wollensky name.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of
operations are based upon our unaudited consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements require us
to make significant estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities.

On an on-going basis, we evaluate our estimates and assumptions,
including those related to revenue recognition, allowance for doubtful accounts,
valuation of inventories, valuation of long-lived assets, goodwill and other
intangible assets, income taxes, income tax valuation allowances, self insurance
medical reserves and legal proceedings. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that can not
readily be determined from other sources. There can be no assurance that actual
results will not differ from those estimates.

We believe the following is a summary of our critical accounting
policies:

Revenue recognition: Sales from owned restaurants are recognized as
revenue at the point of the delivery of meals and services. Management fee
income is recognized as the related management fee is earned pursuant to the
respective agreements.

Allowance for doubtful accounts: Substantially all of our accounts
receivable are due from companies or individuals with good historical records of
payment. Accounts receivable are reduced by an allowance for amounts that may
become uncollectible in the future. Such allowance is established through a
charge to the provision for bad debt expenses.

Long-lived assets: We review long-lived assets to be held and used or
to be disposed of for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable through
future undiscounted net cash flows to be generated by the assets. Recoverability
of assets to be held and used is measured by restaurant comparing the carrying
amount of the restaurant's assets to undiscounted future net cash flows expected
to be generated by such assets. We limit assumptions about such factors as sales
and margin improvements to those that are supportable based upon our plans for
the unit, its individual results and actual results at comparable restaurants.
If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Fair value would be calculated on a discounted cash
flow basis.

Goodwill: Goodwill represents the excess of fair value of certain
reporting units acquired in the formation of the Company over the book value of
those reporting units' identifiable net assets. Goodwill is tested for
impairment at least annually in accordance with the provisions of SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS No. 142 also requires that intangible
assets with estimable useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 144, Accounting for Impairment or Disposal of
Long-Lived Assets. We assess the recoverability of goodwill at

17

the end of each year through a fair value valuation performed for each reporting
unit that has goodwill. The fair value valuation is calculated using various
methods, including an analysis based on projected discounted future operating
cash flows of each reporting unit using a discount rate reflecting our average
cost of funds. We limit assumptions about such factors as sales and margin
improvements to those that are supportable based upon our plans for the unit and
actual results at comparable restaurants. The assessment of the recoverability
of goodwill will be impacted if estimated future operating cash flows are
negatively modified by us as a result of changes in economic conditions,
significant events that occur or other factors arising after the preparation of
any previous analysis. The net carrying value of goodwill as of September 29,
2003 and December 30, 2002 was $6.9 million.

Other intangible assets: We review other intangible assets, which
include costs attributable to a sale and licensing agreement and the cost of the
acquisition of management contracts, for impairment at a minimum, whenever
events or changes in circumstances indicate the carrying value of an asset may
not be recoverable. Recoverability of our intangible assets will be assessed by
comparing the carrying amount of the asset to the undiscounted expected net cash
flows to be generated by such assets. An intangible asset would be considered
impaired if the sum of undiscounted future cash flows is less than the book
value of the assets generating those cash flows. We limit assumptions about such
factors as sales and margin improvements to those that are supportable based
upon our plans for the unit and actual results at comparable restaurants. If
intangible assets are considered to be impaired, the impairment to be recognized
will be measured by the amount by which the carrying amount of the asset exceeds
the fair value of the assets. Fair value would be calculated on a discounted
cash flow basis. The assessment of the recoverability of these intangible assets
will be impacted if estimated future operating cash flows are negatively
modified by us as a result of changes in economic conditions, significant events
that occur or other factors arising after the preparation of any previous
analysis. The net carrying value of our intangible assets as of September 29,
2003 and December 30, 2002 was $4.1 million.

Artwork: We purchase artwork and antiques for display in our
restaurants. We do not depreciate artwork and antiques since these assets have
cultural, aesthetic or historical value that is worth preserving perpetually and
we have the ability and intent to protect and preserve these assets. Such assets
are recorded at cost and are included in other assets in the accompanying
consolidated balance sheets.

Self-insurance liability: We are self insured for our employee health
program. We maintain stop loss insurance to limit our total exposure and
individual claims. The liability associated with this program is based on our
estimate of the ultimate costs to be incurred to settle known claims and claims
incurred but not reported as of the balance sheet date. Our estimated liability
is not discounted and is based on a number of assumptions and factors, including
historical medical claim patterns and known economic conditions. If actual
trends, including the severity or frequency of claims, differ from our
estimates, our financial results could be impacted. However, we believe that a
change in our current accrual requirement of 10% or less would cause an
immaterial change to our financial results.

Legal proceedings: We are involved in various claims and legal
actions, the outcomes of which are not within our complete control and may not
be known for prolonged periods of time. In some actions, the claimants seek
damages, which, if granted, would require significant expenditures. We record a
liability in our consolidated financial statements when a loss is known or
considered probable and the amount can be reasonably estimated. If the
reasonable estimate of a known or probable loss is a range, and no amount within
the range is a better estimate, the minimum amount of the range is accrued. If a
loss is not probable or cannot be reasonably estimated, a liability is not
recorded in the consolidated financial statements.

Income taxes and income tax valuation allowances: We estimate certain
components of our quarterly provision for income taxes. These estimates include,
but are not limited to, effective state and local income tax rates, estimates
related to depreciation expense allowable for tax purposes and estimates related
to the ultimate realization of net operating losses and tax credit carryforwards
and other deferred tax assets. Our estimates are made based on the best
available information at the time that we prepare the provision. We usually file
our income tax returns several months after our fiscal year-end. All tax returns
are subject to audit by federal and state governments, usually years after the
returns are filed and could be subject to differing interpretations of the tax
laws.

On September 29, 2003, we have a valuation allowance of $8.3 million
to reduce our net operating loss and tax credit carryforwards of $5.8 million
and other timing differences of $2.5 million to an amount that will more likely
than not be realized. These net operating loss and tax credit carryforwards
exist in federal and certain state jurisdictions and have varying carryforward
periods and restrictions on usage. The estimation of future taxable income for
federal and state purposes and our resulting ability to utilize net operating
loss and tax credit carryforwards can significantly change based on future
events and operating results. Thus, recorded valuation allowances may be subject
to material future changes.

18

This discussion and analysis should be read in conjunction with the
unaudited consolidated financial statements and related notes included elsewhere
in this Quarterly Report on Form 10-Q.

19

Results of Operations

Three Months Ended Nine Months Ended
September 29, September, 30 September 29, September 30,
2003 2002 2003 2002
---- ---- ---- ----
(Dollars in Thousands)

Owned restaurant sales $ 21,073 100.0% $ 17,213 100.0% $ 67,744 100.0% $ 55,455 100.0%
Cost of owned restaurant sales:
Food and beverage costs 6,639 31.5 5,047 29.3 21,020 31.0 16,015 28.9
Salaries and related benefit
expenses 6,523 31.0 5,793 33.7 19,509 28.8 16,946 30.5
Restaurant operating expenses 3,888 18.4 3,021 17.5 11,340 16.8 8,750 15.8
Occupancy and related expenses 1,026 4.9 1,527 8.9 3,607 5.3 4,378 7.9
Marketing and promotional
expenses 988 4.7 777 4.5 2,820 4.2 2,310 4.2
Depreciation and amortization 944 4.5 856 5.0 2,789 4.1 2,464 4.4
--- --- --- --- ----- --- ----- ---
Total cost of owned restaurant sales 20,008 95.0 17,021 98.9 61,085 90.2 50,863 91.7
------ ---- ------ ---- ------ ---- ------ ----
Income from owned restaurant
operations 1,065 5.0 192 1.1 6,659 9.8 4,592 8.3
Management fee income 331 1.6 502 2.9 1,343 2.0 1,764 3.2
Charge for investment in managed
restaurants -- -- (722) (4.2) -- -- (722) (1.3)
----- --- ----- ----- ----- --- ----- -----
Income (loss) from owned and
managed restaurants 1,396 6.6 (28) (0.2) 8,002 11.8 5,634 10.1
General and administrative expenses 2,302 10.9 2,489 14.5 7,438 11.0 7,273 13.1
Royalty expense 329 1.6 250 1.5 1,046 1.5 784 1.4
--- --- --- --- ----- --- --- ---

Operating loss (1,235) (5.9) (2,767) (16.1) (482) (0.7) (2,423) (4.4)

Interest income (expense), net (360) (1.7) (16) (0.1) (715) (1.1) (8) 0.0
----- ----- ---- ----- ----- ----- --- ---

Loss before provision for income
taxes (1,595) (7.6) (2,783) (16.2) (1,197) (1.8) (2,431) (4.4)
Provision for income taxes 35 0.1 56 0.3 160 0.2 157 0.3
-- --- -- --- --- --- --- ---

Net loss $(1,630) (7.7)% $ (2,839) (16.5)% $ (1,357) (2.0)% (2,588) (4.7)%
======== ====== ========= ======= ========= ====== ========= ======

Three Months Ended September 29, 2003 Compared to the Three Months Ended
September 30, 2002

Owned Restaurant Sales. Owned restaurant sales increased $3.9 million, or 22.4%,
to $21.1 million for the three months ended September 29, 2003 from $17.2
million for the three months ended September 30, 2002. The increase in owned
restaurant sales related primarily to an increase in comparable owned unit sales
of $2.6 million, or 17.0%. This reflected an increase in sales of $2.6 million
from our owned Smith & Wollensky units open for the entire period and a modest
net increase in sales of $10,000 from our three owned New York units. The
improvement is primarily a result of an increase in tourism, business travel and
banquet sales at our units outside of New York and a slight return of tourism
and, what we believe to be, the beginnings of a general economic recovery in the
New York metropolitan area as compared to 2002. The increase in owned restaurant
sales also includes a combined sales increase of $1.3 million from our Smith &
Wollensky unit in Columbus, Ohio, which opened in June 2002, and our new unit in
Dallas, Texas, which opened in March 2003.

20

Food and Beverage Costs. Food and beverage costs increased $1.6 million to $6.6
million for the three months ended September 29, 2003 from $5.0 million for the
three months ended September 30, 2002. Food and beverage costs as a percentage
of owned restaurant sales increased to 31.5% in 2003 from 29.3% in 2002. The
increase was primarily due to the continued higher costs for prime beef that
began in the fourth quarter of 2002 and has continued through the third quarter
of 2003, as compared to the three months ended September 30, 2002. We have
continued to see no relief in the cost for prime beef during the first half of
the fourth quarter. Increased costs also related to the new Smith & Wollensky
unit in Dallas, Texas, which opened in March 2003. Food and beverage costs
related to this new unit accounted for $429,000 of the increase for the
three-months ended September 29, 2003. The new Smith & Wollensky unit in Dallas,
Texas experienced higher than normal food and beverage costs as a percentage of
sales as a result of initial startup inefficiencies and a lower revenue base. As
the Smith & Wollensky unit in Dallas, Texas matures and revenues increase,
operating efficiencies are expected to continue to improve and the food and
beverage costs as a percentage of sales for that unit are expected to decrease.

Salaries and Related Benefits. Salaries and related benefits increased $730,000
to $6.5 million for the three months ended September 29, 2003 from $5.8 million
for the three months ended September 30, 2002. This increase was primarily due
to the new Smith & Wollensky unit in Dallas, Texas, which opened in March 2003.
The increase relating to the new unit was $398,000. Salaries and related
benefits as a percent of owned restaurant sales decreased to 31.0% for the three
months ended September 29, 2003 from 33.7% for the three months ended September
30, 2002. The decrease in salaries and related benefits as a percentage of owned
restaurant sales was primarily due to the leveraging effect of sales increases
on the fixed portion of restaurant salaries and related benefits and to a lesser
extent improved results in the costs of claims for health insurance under our
self-insurance policy. This decrease was partially offset by the additional
staffing required at the new Smith & Wollensky unit in Dallas, Texas during the
unit opening. It is common for our new restaurants to experience increased costs
for additional staffing in the first six months of operations. Generally, as the
unit matures and revenues increase, operating efficiency is expected to improve
as we expect that staffing will be reduced through efficiencies and salaries and
wages as a percentage of sales for that unit will decrease due to the lower
staffing requirement and higher revenue base.

Restaurant Operating Expenses. Restaurant operating expenses increased $867,000
to $3.9 million for the three months ended September 29, 2003 from $3.0 million
for the three months ended September 30, 2002. The increase includes $237,000
that was due to the opening of the new Smith & Wollensky unit in Dallas, Texas.
The remaining increase is related to certain costs associated with upgrades of
operating supplies, ongoing repairs and maintenance, certain costs that are
directly related to the increased sales volume such as credit card charges,
linen costs and increases in property and liability insurance premiums at the
units open the entire period. Restaurant operating expenses as a percentage of
owned restaurant sales increased to 18.4% for 2003 from 17.5% in 2002.

Occupancy and Related Expenses. Occupancy and related expenses decreased
$501,000 to $1.0 million for the three months ended September 29, 2003 from $1.5
million for the three months ended September 30, 2002 primarily due to the
reduction in rent of $515,000 for the Smith & Wollensky unit in Las Vegas,
Nevada and the treatment of the lease as a capital lease. The lease was amended
on April 29, 2003. The decrease in occupancy and related expenses was offset by
increases in percentage of sales rent at applicable units. Occupancy and related
expenses as a percentage of owned restaurant sales decreased to 4.9% for the
three months ended September 29, 2003 from 8.9% for the three months ended
September 30, 2002.

Marketing and Promotional Expenses. Marketing and promotional expenses increased
$211,000 to $988,000 for the three months ended September 29, 2003 from $777,000
for the three months ended September 30, 2002. The increase was related
primarily to the opening of the Smith & Wollensky unit in Dallas, Texas. The
increase to a lesser extent can be attributed to an increase in promotional
events at the units open the entire period. Marketing and promotional expenses
as a percent of owned restaurant sales increased to 4.7% for the three months
ended September 29, 2003 from 4.5% for the three months ended September 30,
2002.

Depreciation and Amortization. Depreciation and amortization increased $88,000
to $944,000 for the three months ended September 29, 2003 from $856,000 for the
three months ended September 30, 2002, primarily due to the property and
equipment additions for the new Smith & Wollensky unit in Dallas, Texas.

Management Fee Income. Management fee income decreased $171,000 to $331,000 for
the three months ended September 29, 2003 from $502,000 for the three months
ended September 30, 2002, primarily due to a decrease in fees received from two
of our managed units whose fees relate directly to the amount of operating cash
flow being generated by these units.

21

Charge for Investment in Managed Restaurants. The charge for investment in
managed restaurants of $722,000 in 2002 represented the costs associated with an
unsettled contractual dispute relating to ONEc.p.s and management's belief that
our initial investment in this managed property was impaired.

General and Administrative Expenses. General and administrative expenses
decreased by $187,000 to $2.3 million for the three months ended September 29,
2003 from $2.5 million for the three months ended September 30, 2002. General
and administrative expenses as a percent of owned restaurant sales decreased to
10.9% for the three months ended September 29, 2003 from 14.5% for three months
ended September 30, 2002. General and administrative expenses include corporate
payroll and other expenditures that benefit both owned and managed units.
General and administrative expenses as a percentage of owned and managed
restaurant sales decreased to 7.2% for the three months ended September 29, 2003
from 8.7% for the three months ended September 30, 2002. The decrease was
primarily due to a decrease in travel and related expenditures, certain
professional fees and other miscellaneous expenses, partially offset by an
increase in salaries and related benefits.

Royalty Expense. Royalty expense increased $79,000 to $329,000 for the three
months ended September 29, 2003 from $250,000 for the three months ended
September 30, 2002 primarily due to the increase in sales of $2.6 million from
our owned Smith & Wollensky units open for the comparable period together with a
combined increase in sales of $1.3 million from our Smith & Wollensky unit in
Columbus, Ohio, which opened in June 2002, and our new unit in Dallas, Texas,
which opened in March 2003.

Interest Expense -Net of Interest Income. Interest expense, net of interest
income, increased $344,000 to $360,000 for the three months ended September 29,
2003 from $16,000 for the three months ended September 30, 2002, primarily due
to the interest expense on debt incurred for general corporate purposes and in
connection with the financing of our new Smith & Wollensky unit in Dallas, Texas
combined with the interest related to the capital lease for the Smith &
Wollensky unit in Las Vegas, Nevada.

Provision for Income Taxes. The income tax provision for the three months ended
September 29, 2003 and September 30, 2002, respectively, represents certain
state and local taxes. No federal income tax was provided for the three months
ended September 29, 2003 and September 30, 2002, respectively, due to the net
operating loss carryforward.

Nine Months Ended September 29, 2003 Compared to the Nine Months Ended September
30, 2002

Owned Restaurant Sales. Owned restaurant sales increased $12.3 million, or
22.2%, to $67.7 million for the nine months ended September 29, 2003 from $55.5
million for the nine months ended September 30, 2002. The increase in owned
restaurant sales related primarily to an increase in comparable owned unit sales
of $6.8 million, or 12.7%. This included an increase in sales of $7.5 million
from our owned Smith & Wollensky units open for the entire period. The
improvement is primarily a result of an increase in tourism, business travel and
banquet sales at our units outside of New York as compared to 2002. The
comparable owned unit sales net increases were offset by a decrease in sales of
$751,000 from our three owned New York units due to the economic slowdown and
decreased tourism that continued through the six month period ended June 30,
2003 in the New York metropolitan area. The increase in owned restaurant sales
also includes a combined sales increase of $5.5 million from our Smith &
Wollensky unit in Columbus, Ohio, which opened in June 2002, and our new unit in
Dallas, Texas, which opened in March 2003.

Food and Beverage Costs. Food and beverage costs increased $5.0 million to $21.0
million for the nine months ended September 29, 2003 from $16.0 million for the
nine months ended September 30, 2002. Food and beverage costs as a percentage of
owned restaurant sales increased to 31.0% in 2003 from 28.9% in 2002. The
increase was primarily due to the continued higher costs for prime beef that
began in the fourth quarter of 2002, and continued through the first nine months
of 2003 as compared to the nine months ended September 30, 2002. We have
continued to see no relief in the cost for prime beef during the first half of
the fourth quarter. Increased costs also related to the new Smith & Wollensky
unit in Columbus, Ohio, which opened in June 2002 and the new Smith & Wollensky
unit in Dallas, Texas, which opened in March 2003. Food and beverage costs
related to these new units accounted for $1.9 million of the increase for the
nine-months ended September 29, 2003. The new Smith & Wollensky unit in Dallas,
Texas experienced higher than normal food and beverage costs as a percentage of
sales as a result of initial startup inefficiencies and a lower revenue base. As
the new unit matures and revenues increase, operating efficiency is expected to
continue to improve and the food and beverage costs as a percentage of sales for
that unit are expected to decrease.

Salaries and Related Benefits. Salaries and related benefits increased $2.6
million to $19.5 million for the nine months ended September 29, 2003 from $16.9
million for the nine months ended September 30, 2002. This increase was
primarily due to the new Smith & Wollensky unit in Columbus, Ohio, which opened
in June 2002, and the new Smith & Wollensky unit in Dallas, Texas, which opened
in March 2003. The increase relating to these new units was $1.7 million.
Salaries and related benefits as a percent of

22

owned restaurant sales decreased to 28.8% for the nine months ended September
29, 2003 from 30.5% for the nine months ended September 30, 2002. The decrease
in salaries and related benefits as a percentage of owned restaurant sales was
primarily due to the leveraging effect of sales increases on the fixed portion
of restaurant salaries and related benefits and to a lesser extent improved
results in the costs of claims for health insurance under our self-insurance
policy. This decrease was partially offset by the additional staffing required
at the new Smith & Wollensky unit in Dallas, Texas during and after the unit
opening. It is common for our new restaurants to experience increased costs for
additional staffing in the first six months of operations. Generally, as the
unit matures and revenues increase, operating efficiency is expected to improve
as we expect that staffing will be reduced through efficiencies and salaries and
wages as a percentage of sales for that unit will decrease due to the lower
staffing requirement and higher revenue base.

Restaurant Operating Expenses. Restaurant operating expenses increased $2.5
million to $11.3 million for the nine months ended September 29, 2003 from $8.8
million for the nine months ended September 30, 2002. The increase includes $1.1
million that was due to the opening of the new Smith & Wollensky units in
Columbus, Ohio and Dallas, Texas. The remaining increase is related to increases
in insurance premiums, costs associated with upgrades of operating supplies,
required general repairs and maintenance and charges related to the increased
sales volume such as credit card charges and linen costs at the units open the
entire period. Restaurant operating expenses as a percentage of owned restaurant
sales increased to 16.8% for 2003 from 15.8% in 2002.

Occupancy and Related Expenses. Occupancy and related expenses decreased
$771,000 to $3.6 million for the nine months ended September 29, 2003 from $4.4
million for the nine months ended September 30, 2002, primarily due to the
reduction in rent of $1.0 million for the Smith & Wollensky unit in Las Vegas,
Nevada and the treatment of the lease as a capital lease. The lease was amended
on April 29, 2003. The decrease was offset by the combined increase of $235,000
in occupancy and related expenses including real estate and occupancy taxes for
the new Smith & Wollensky units in Columbus, Ohio and Dallas, Texas. Occupancy
and related expenses as a percentage of owned restaurant sales decreased to 5.3%
for the nine months ended September 29, 2003 from 7.9% for the nine months ended
September 30, 2002.

Marketing and Promotional Expenses. Marketing and promotional expenses increased
$510,000 to $2.8 million for the nine months ended September 29, 2003 from $2.3
million for the nine months ended September 30, 2002. The increase was related
primarily to the opening of the new Smith & Wollensky units in Columbus, Ohio
and Dallas, Texas. Marketing and promotional expenses as a percent of owned
restaurant sales remained constant at 4.2% for the nine-months ended September
29, 2003 and September 30, 2002, respectively.

Depreciation and Amortization. Depreciation and amortization increased $326,000
to $2.8 million for the nine months ended September 29, 2003 from $2.5 million
for the nine months ended September 30, 2002, primarily due to the property and
equipment additions for the new Smith & Wollensky units in Columbus, Ohio and
Dallas, Texas.

Management Fee Income. Management fee income decreased $421,000 to $1.3 million
for the nine months ended September 29, 2003 from $1.8 million for the nine
months ended September 30, 2002, primarily due to a decrease in fees received
from two of our managed units whose fees relate directly to the amount of
operating cash flow being generated by these units.

Charge for Investment in Managed Restaurants. The charge for investment in
managed restaurants of $722,000 in 2002 represented the costs associated with an
unsettled contractual dispute relating to ONEc.p.s and management's belief that
our initial investment in this managed property was impaired.

General and Administrative Expenses. General and administrative expenses
increased by $165,000 to $7.4 million for the nine months ended September 29,
2003 from $7.3 million for the nine months ended September 30, 2002. General and
administrative expenses as a percent of owned restaurant sales decreased to
11.0% for the nine months ended September 29, 2003 and from 13.1% for nine
months ended September 30, 2002. General and administrative expenses include
corporate payroll and other expenditures that benefit both owned and managed
units. General and administrative expenses as a percentage of owned and managed
restaurant sales decreased to 7.5% for the nine months ended September 29, 2003
from 8.1% for the nine months ended September 30, 2002. The increase in general
and administrative expenses was primarily due to an increase in directors and
officers insurance premiums, salaries and related benefits and other
miscellaneous expenses offset by a decrease in public relations.

Royalty Expense. Royalty expense increased $262,000 to $1.0 million for the nine
months ended September 29, 2003 from $784,000 for the nine months ended
September 30, 2002 primarily due to the increase in sales of $7.5 million from
our owned Smith & Wollensky units open for the comparable period and an increase
of $5.5 million in combined sales from our Smith & Wollensky unit in Columbus,
Ohio, which opened in June 2002, and our new unit in Dallas, Texas, which opened
in March 2003.

23

Interest Expense-Net of Interest Income. Interest expense, net of interest
income, increased $707,000 to $715,000 of interest expense for the nine months
ended September 29, 2003 from $8,000 of interest expense for the nine months
ended September 30, 2002, primarily due to the interest expense on debt incurred
for general corporate purposes and in connection with the financing of our new
Smith & Wollensky unit in Dallas, Texas combined with the interest related to
the capital lease for the Smith & Wollensky unit in Las Vegas, Nevada.

Provision for Income Taxes. The income tax provision for the nine months ended
September 29, 2003 and September 30, 2002, respectively, represents certain
state and local taxes. No federal income tax was provided for the nine months
ended September 29, 2003 and September 30, 2002, respectively, due to the net
operating loss carryforward.

Risk Related to Certain Management Agreements and Lease Agreements

We are subject to a right of the other party to terminate, at any
time, the agreement relating to ONEc.p.s. We have not been notified by the other
parties to this agreement that they plan to terminate the agreement and
management has no reason to believe that the agreement will be terminated.

Pursuant to our lease agreement for Cite with Rockefeller Center
North, Inc., Rockefeller Center may terminate the lease agreement if Mr.
Stillman does not own at least 35% of the shares of each class of the tenants
stock, or if there is a failure to obtain their consent to an assignment of the
lease. We are currently in default with respect to these requirements, although
Rockefeller Center has not given us notice of default. Rockefeller Center may
also terminate the lease agreement if Mr. Stillman does not have effective
working control of the business of the tenant. The default existing under the
lease agreement for Cite could subject us to renegotiation of the financial
terms of the lease, or could result in a termination of this agreement which
would result in the loss of this restaurant at this location. This event could
have a material adverse effect on our business and our financial condition and
results of operations. To date, none of the parties to this agreement has taken
any action to terminate this agreement and management has no reason to believe
that the agreement will be terminated.

Liquidity and Capital Resources

We have funded our capital requirements in recent years through cash
flow from operations, a private placement of preferred stock, the sale of
subordinated notes, bank debt and an initial public offering of our common
stock. Net cash provided by operating activities amounted to $1.1 million and
$440,000 for the nine months ended September 29, 2003 and September 30, 2002,
respectively.

Net cash used in financing activities was $914,000 and net cash
provided by financing activities was $3.8 million for the nine months ended
September 29, 2003 and September 30, 2002, respectively. Funds used in financing
activities primarily represents principal payments on our long-term debt for the
nine months ended September 29, 2003 and funds provided by financing activities
primarily represent funds from the issuance of long term debt during the nine
months ended September 30, 2002.

We used cash primarily to fund the development and construction of
new restaurants and remodeling of existing restaurants. Net cash used in
investing activities was $2.5 million and $7.3 million for the nine months ended
September 29, 2003 and September 30, 2002, respectively. Total capital
expenditures were $5.6 million and $3.8 million for the nine months ended
September 29, 2003 and September 30, 2002, respectively. On March 17, 2003, we
opened the Smith & Wollensky unit in Dallas, Texas.

The remaining capital expenditures in 2003 are expected to be
approximately $3.4 million. The increase in the remaining capital expenditures
from those previously disclosed related primarily to an increase in the square
footage and seating capacity for the new Smith & Wollensky restaurant that we
plan to open in the first quarter of 2004 in Houston, Texas. The opening date
was moved back from the fourth quarter of 2003 due to the additional cost and
hiring difficulties associated with opening a restaurant during the holiday
season. We expect the restaurant in Houston to have approximately 400 seats on
two levels. We also expect to open another new Smith & Wollensky in Boston in
the third quarter of 2004. We expect the restaurant in Boston to have
approximately 400 seats on four levels. Although we expect to open one to two
restaurants per year starting in 2005, we plan to move ahead cautiously with our
future expansion, as management evaluates and monitors economic and security
conditions and available capital generated internally and from outside sources.
We expect additional locations to have seating capacities ranging from 375 to
450 seats, but would consider locations with larger seating capacities where
appropriate. We intend to develop restaurants that will require, on average, a
total cash investment of $2.0 million to $5.0 million net of landlord

24

contributions and excluding pre-opening costs. This range assumes that the
property on which the new unit is located is being leased. The average cost of
opening the last three Smith & Wollensky restaurants, net of landlord
contributions, has been approximately $2.7 million, excluding the purchase of
land and pre-opening costs.

In 1997, we assumed certain liabilities from two bankrupt
corporations in connection with the acquisition of our lease for the Smith &
Wollensky in Miami. Pursuant to the terms of the bankruptcy resolution, we are
obligated to make quarterly and annual payments over a six-year period. These
obligations bear interest at rates ranging from 9.0% to 12.0%. The aggregate
outstanding balance of such liabilities was approximately $4,000 as of September
29, 2003. In addition, we assumed a mortgage on the Miami property that requires
monthly interest and principal payments, with a final principal payment of
$911,000 in June 2004. The mortgage bears interest at 5.75% per year. We also
assumed a loan payable to a financing institution that requires monthly payments
through the year 2014 and bears interest at 7.67% per year. The aggregate
balance of the mortgage and loan payable was approximately $1.7 million on
September 29, 2003.

On August 23, 2002, we entered into a $14.0 million secured term loan
agreement with Morgan Stanley Dean Witter Commercial Financial Services, Inc.
("Morgan Stanley"). Under the agreement we are the guarantors of borrowings by
our wholly owned subsidiary, S&W Las Vegas, LLC. We borrowed $4.0 million under
the agreement for general corporate purposes, including our new restaurant
development program. This portion of the loan bears interest at a fixed rate of
6.35% per annum. Principal payments for this portion of the loan commenced June
30, 2003. Pursuant to the terms of the loan agreement, we are obligated to make
monthly principal payments of $33,333 for this portion of the loan over the term
of the loan and a balloon payment of approximately $2.0 million on May 31, 2008,
the maturity date of the loan. The term loan is secured by a leasehold mortgage
relating to the Las Vegas property and all of the personal property and fixtures
of S&W Las Vegas, LLC. As previously disclosed, the balance of the funds
available under the agreement had been intended to be used by us to exercise our
purchase option for the land and building at 3767 Las Vegas Blvd. where we
operate our 675-seat, 30,000 square foot restaurant. The ability to draw down
this balance expired on May 31, 2003. We did not draw down the remaining balance
because, as an alternative to purchasing the land, we signed an amendment to our
lease agreement. As a result of not drawing on the additional $10.0 million
previously available to us under the $14.0 million secured term loan agreement,
on September 28, 2003, Morgan Stanley amended, among other things, the interest
coverage ratio covenant of the term loan agreement. The costs in connection with
the amendment were not material. At September 29, 2003 we were in compliance
with all the financial covenants contained in this amended loan agreement.

We no longer intend to draw down the remaining balance because on
April 29, 2003, as an alternative to purchasing the land, we signed a second
amendment to lease agreement ("Agreement") with The Somphone Limited Partnership
("Lessor"), the owner of the land. The Agreement, which will be accounted for as
a capital lease, adjusts the annual fixed payment to $400,000 per year from May
1, 2003 to April 30, 2008 and to $860,000 per year from May 1, 2008 to April 30,
2018. The Agreement also amends the amount of the purchase price option
available to us effective from May 1, 2003. We will have the option to purchase
the property over the next five years at an escalating purchase price. The
purchase price was approximately $10.0 million at May 1, 2003, and escalates to
approximately $12.1 million at the end of five years. We are required to make
down payments on the purchase of the property. Those payments, which escalate
annually, are payable in monthly installments into a collateralized sinking fund
based on the table below, and will be applied against the purchase price at the
closing of the option. If at the end of the five years we do not exercise the
option, the Lessor receives the down payments that accumulated in the sinking
fund, and thereafter the purchase price for the property would equal $10.5
million. The down payments for the purchase of the land over the next five years
as of September 29, 2003 will be as follows:

Fiscal year
-----------
(dollar amounts in thousands)
-----------------------------
2003 $ 63
2004 269
2005 298
2006 328
2007 360
Thereafter 123
-----
$1,441
======

25

If we exercise the option, the Lessor is obligated to provide us with
financing in the amount of the purchase price applicable at the time of the
closing, less any down payments already made, at an interest rate of 8% per
annum, payable over ten years.

The Agreement also provides the Lessor with a put right that would
give the Lessor the ability to require us to purchase the property at any time
after June 15, 2008 at the then applicable purchase price. In the event of the
exercise of the put option, the Lessor is obligated to provide us with financing
in the amount of the purchase price applicable at that time. We will then have
two months to close on the purchase of the property.

On May 14, 2003, a letter was signed by Morgan Stanley confirming
that the treatment of the Agreement as a capital lease does not violate the debt
restriction covenant of the secured term loan agreement and that the capital
lease and any imputed interest related to the capital lease are excluded from
the calculation of the financial covenants.

On October 9, 2002, we purchased the property for the Smith &
Wollensky unit in Dallas. The purchase price for this property was $3.75
million. A portion of the purchase price for this property was financed through
a $1.65 million promissory note that was signed by Dallas S&W, L.P., our wholly
owned subsidiary. This loan bears interest at 8% per annum and requires annual
principal payments of $550,000 with the first installment being prepaid on March
4, 2003, and the subsequent two installments due on October 9, 2004 and October
9, 2005, respectively. The promissory note is secured by a first mortgage
relating to the Dallas property.

On December 24, 2002 we entered into a $1.9 million secured term loan
agreement with Morgan Stanley. Under the agreement the Company and Dallas S&W
L.P., a wholly owned subsidiary are the guarantors of borrowings by our wholly
owned subsidiary, S&W Las Vegas, LLC. Of the $1.9 million borrowed by us under
the agreement, $1.35 million was used for our new restaurant development
program, and $550,000 was used for the first principal installment on the $1.65
million promissory note with Toll Road Texas Land Company, L.P. described above.
This loan bears interest at a fixed rate of 6.36% per annum. Principal payments
for this loan commenced January 24, 2003. Pursuant to the terms of the loan
agreement, we are obligated to make monthly principal payments of $15,833 for
this loan over the term of the loan and a balloon payment of approximately $1.0
million on December 24, 2007, the maturity date of the loan. The term loan is
secured by a second mortgage relating to the Dallas property and a security
interest in all of the personal property and fixtures of Dallas S&W L.P. The
term loan is also secured by the leasehold mortgage relating to the Las Vegas
property. The aggregate outstanding balance of this term loan was approximately
$1.8 million as of September 29, 2003. On September 28, 2003, Morgan Stanley
amended, among other things, the interest coverage ratio covenant of the term
loan agreement. The costs in connection with the amendment were not material. At
September 29, 2003 we were in compliance with the financial covenants contained
in the amended loan agreement.

We are currently finalizing an agreement in respect of a $2.0 million
two year secured revolving credit facility with Morgan Stanley. Under the
agreement we would be the guarantor of borrowings by our wholly owned
subsidiary, S&W Las Vegas, LLC. Through S&W Las Vegas, LLC, we would have the
ability to borrow up to $2.0 million under the agreement for general corporate
purposes. We anticipate that this facility will be finalized during the fourth
quarter of 2003. We cannot assure you that we will obtain this facility. Any
failure to obtain this facility could have an adverse effect on our expansion
plans in 2004.

We believe that our cash and short-term investments on hand,
anticipated secured revolving credit facility, cash expected from operations and
expected landlord construction contributions should be sufficient to finance our
planned capital expenditures and other operating activities, including funding
working capital, throughout the remainder of 2003 and through 2004. Changes in
our operating plans, acceleration of our expansion plans, lower than anticipated
sales, increased expenses, potential acquisitions or other events may cause us
to seek additional financing sooner than anticipated. We may require additional
capital to fund our expansion plans after fiscal 2003 or to satisfy working
capital needs in the event that the general economic conditions worsen. As a
result we would seek to obtain additional funds through commercial borrowings or
the private or public issuance of debt or equity securities. However, there can
be no assurance that such funds will be available when needed or be available on
terms acceptable to us. Failure to obtain financing as needed could have a
material adverse effect on our expansion plans.

Below is a summary of certain of our contractual obligations as of
September 29, 2003. Please refer to the discussion above and the Notes to
Unaudited Consolidated Financial Statements for additional disclosures regarding
the obligations described in the table below:

26

PAYMENTS DUE BY PERIOD
----------------------
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
----- ------ --------- --------- -------
(dollars in thousands)

Minimum royalty payments licensing agreement .... $4,000 $0 $1,600 $1,600 $800(1)
Minimum distributions management agreement ...... $3,450 $90 $960 $960 $1,440
Minimum payments on employment agreements ....... $4,502 $341 $2,758 $1,403 $0
Principal payments on long-term debt ............ $8,394 $174 $3,310 $2,240 $2,670
Payments under capital lease..................... $11,874 $162 $1,367 $1,488 $8,857
Minimum annual rental commitments ............... $61,563 $979 $7,830 $7,279 $45,475
------- ---- ------ ------ -------
$93,783 $1,746 $17,825 $14,970 $59,242
======= ====== ======= ======= =======

- -----------

(1) The license agreement is irrevocable and perpetual unless terminated
in accordance with the terms of the agreement. See Notes to the
Unaudited Consolidated Financial Statements, Note 4.

Properties

We lease restaurant and office facilities and real property under
operating leases expiring in various years through 2028. As of September 29,
2003, our future minimum lease payments of our headquarters and restaurants are
as follows: 2003--$1.0 million; 2004--$3.8 million; 2005--$4.0 million; and
thereafter--$52.8 million. In addition, certain leases contain contingent rental
provisions based upon the sales of the underlying restaurants.

Seasonality

Our business is seasonal in nature depending on the region of the
United States in which a particular restaurant is located, with revenues
generally being less in the third quarter than in other quarters due to reduced
summer volume and highest in the fourth quarter due to year-end and holiday
events. As we continue to expand in other locations, the seasonality pattern may
change.

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Inflation

Components of our operations subject to inflation include food,
beverage, lease and labor costs. Our leases require us to pay taxes,
maintenance, repairs, insurance, and utilities, all of which are subject to
inflationary increases. We believe inflation has not had a material impact on
our results of operations in recent years.

Effect of New Accounting Standards

In April 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 145, Rescission
of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. SFAS No. 145 amends existing guidance on reporting gains
and losses on the extinguishment of debt to prohibit the classification of the
gain or loss as extraordinary, as the use of such extinguishments have become
part of the risk management strategy of many companies. SFAS No. 145 also amends
SFAS No. 13 to require sale-leaseback accounting for certain lease modifications
that have economic effects similar to sale-leaseback transactions. The
provisions of the Statement related to the rescission of Statement No. 4 is
applied in fiscal years beginning after May 15, 2002. The provisions of the
Statement related to Statement No. 13 were effective for transactions occurring
after May 15, 2002. The implementation of this standard had no material impact
on our results of operations.

In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The disclosure requirements are effective for financial
statements of interim and annual periods ending after December 31, 2002. The
initial recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after December 31, 2002 and had no
material effect on our financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation Transition and Disclosure, an amendment of FASB
Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. The Company accounts for stock-based compensation using the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees. The Company has adopted the
pro forma disclosure requirements of SFAS No. 123, Accounting for Stock-Based
Compensation.

In January 2003, the FASB issued Interpretation No.46, Consolidation
of Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51. This Interpretation addresses the consolidation by business enterprises
of variable interest entities as defined in the Interpretation. The
Interpretation applies immediately to variable interests in variable interest
entities created after January 31, 2003, and to variable interests in such
entities obtained after January 31, 2003. For enterprises, such as SWRG, with a
variable interest in a variable interest entity created before February 1, 2003,
the Interpretation is applied to the enterprise at the end of interim or annual
periods ending after December 15, 2003. An entity shall be subject to
consolidation according to the provisions of this Interpretation if, by design,
the following conditions exists - As a group the holders of the equity
investment at risk lack any one of the following three characteristics of a
controlling financial interest: (1) the direct or indirect ability to make
decisions about an entity's activities through voting rights or similar rights;
(2) the obligation to absorb the expected losses of the entity if they occur; or
(3) the right to receive the expected residual returns of the entity if they
occur. The Company is currently evaluating the impact of the application of this
Interpretation and the effect it may have on our financial statements. The
Company believes that at least one of its managed restaurants, which is owned by
a separate partnership, could be considered a variable interest entity that may
need to be consolidated. We believe that if such entity were to be consolidated,
this entity would gross up our consolidated sales by approximately $6.8 million
and our restaurant operating costs by approximately $6.3 million for the nine
months ended September 29,2003, but the impact on the Company's net income would
not be material.

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In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. This
statement requires instruments that are mandatorily redeemable, among other
financial instruments, which embody an unconditional obligation requiring the
issuer to redeem them by transferring its assets at a specified or determinable
date or upon an event that is certain to occur, be classified as liabilities.
Certain provisions of this statement became effective for financial instruments
entered into or modified after May 31, 2003 and was effective at the beginning
of the first interim period beginning after June 15, 2003. The implementation of
the provisions that became effective had no material impact on the Company's
financial statements. Through the staff position issued on November 7, 2003, the
FASB deferred application of several provisions of SFAS No. 150 for specified
mandatorily redeemable noncontrolling interests of all entities and for the
classification and measurement provisions for such interests. The staff position
also deferred measurement provisions for mandatorily noncontrolling interests
that are redeemable prior to liquidation or termination of the subsidiary and
that were issued before November 5, 2003. We believe that the implementation of
the deferred provisions will not have a material impact on the Company's
financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

We are exposed to changing interest rates on our outstanding mortgage in
relation to the Smith & Wollensky, Miami property that bears interest at prime
rate plus 1%. The interest cost of our mortgage is affected by changes in the
prime rate. The table below provides information about our indebtedness that is
sensitive to changes in interest rates. The table presents cash flows with
respect to principal on indebtedness and related weighted average interest rates
by expected maturity dates. Weighted average rates are based on implied forward
rates in the yield curve at September 29, 2003.

Expected Maturity Date
----------------------
Fiscal Year Ended
-----------------

Fair Value
September 29,
Debt 2003 2004 2005 2006 2007 Thereafter Total 2003
- ---- ---- ---- ---- ---- ---- ---------- ----- ----
(dollars in thousands)

Long-term variable rate...... $11 $936 $947 $947
Average interest rate........ 5.8%
Long-term fixed rate......... $163 $1,185 $1,189 $643 $1,597 $2,670 7,447 8,414
Average interest rate........ 6.7%
------- ------

Total debt $8,394 $9,361
====== ======

We have no derivative financial or derivative commodity instruments.
We do not hold or issue financial instruments for trading purposes.

29

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

An evaluation of the effectiveness of the design and operation of our
"disclosure controls and procedures" (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end
of the period covered by this Report on Form 10-Q was made under the supervision
and with the participation of management, including its Chief Executive Officer
and Chief Financial Officer. Based upon this evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of the
period covered by this Quarterly Report on Form 10-Q, our disclosure controls
and procedures (a) are effective to ensure that information required to be
disclosed by us in reports filed or submitted under the Exchange Act is timely
recorded, processed, summarized and reported and (b) include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by us in reports filed or submitted under the Exchange Act is
accumulated and communicated to management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.

Changes in Internal Controls

There was no change in our internal controls over financial reporting
(as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the
period covered by this report that has materially affected, or is reasonably
likely to materially affect, our internal controls over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

On or about September 5, 2001, Mondo's of Scottsdale, L.C.
filed a suit against SWRG alleging that SWRG had entered into
an agreement to purchase all of the leasehold interest in, and
certain fixtures and equipment located at, Mondo's restaurant
located in Scottsdale, Arizona. The suit was filed in the
Superior Court of the State of Arizona in and for the County
of Maricopa and has been set to go to jury trial in March
2004. The plaintiff requested damages of approximately $2.0
million. SWRG is vigorously contesting this suit. Management
believes, based on advice from local counsel, that SWRG has a
significant likelihood of prevailing in the suit and that the
risk of loss is not probable. Accordingly, SWRG has not
established a reserve for loss in connection with this suit.
If SWRG were to lose the suit, the financial position, results
of operation and cash flows of SWRG may be adversely affected.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits

10.71 Amendment No. 3 to Lease Dated April 6, 2000 by and between
Saunstar Operating Co., LLC and S&W of Boston, LLC.

10.72 Amendment to Term Loan Agreement by and between S&W of Las
Vegas, L.L.C. as "Borrower" and Morgan Stanley Dean Witter
Commercial Financial Services, Inc. as the "Lender" dated as
of October 25, 2002.

10.73 Second Amendment to Term Loan Agreement by and between S&W of
Las Vegas, L.L.C. as "Borrower" and Morgan Stanley Dean Witter
Commercial Financial Services, Inc. as the "Lender" dated as
of December 24, 2002.

10.74 Amendment to Term Loan Agreements by and between S&W of Las
Vegas, L.L.C. as "Borrower", The Smith & Wollensky Restaurant
Group, Inc. and Dallas S&W, L.P. as "Guarantors" and Morgan
Stanley Dean Witter Commercial Financial Services, Inc. as the
"Lender" dated as of August 20, 2003.

30

10.75 Amendment to Term Loan Agreements by and between S&W of Las
Vegas, L.L.C. as "Borrower", The Smith & Wollensky Restaurant
Group, Inc. and Dallas S&W, L.P. as "Guarantors" and Morgan
Stanley Dean Witter Commercial Financial Services, Inc. as the
"Lender" dated as of September 28, 2003.

31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes - Oxley Act of 2002.

31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes - Oxley Act of 2002.

32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K.

Report on Form 8-K dated October 6, 2003 furnishing under
Items 7and 12 a copy of the Company's press release dated
October 2, 2003, describing selected financial results of the
Company for the quarter ended September 29, 2003.

Report on Form 8-K dated November 10 , 2003 furnishing under
Items 7 and 12 a copy of the Company's press release dated
November 6, 2003, describing selected financial results of the
Company for the three and nine months ended September 29,
2003.

31

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

THE SMITH & WOLLENSKY RESTAURANT GROUP, INC.

November 13, 2003 By: /s/ ALAN N. STILLMAN
---------------------

Name: Alan N. Stillman
Title: Chairman of the Board, Chief Executive Officer and Director
(Principal Executive Officer)

November 13, 2003 By: /s/ ALAN M. MANDEL
-------------------

Name: Alan M. Mandel
Title: Chief Financial Officer, Executive Vice President of Finance,
Secretary and Treasurer
(Principal Financial and Accounting Officer)

32

Exhibits No. Description of Documents
- ------------ ------------------------

10.71 Amendment No. 3 to Lease Dated April 6, 2000 by and between
Saunstar Operating Co., LLC and S&W of Boston, LLC.

10.72 Amendment to Term Loan Agreement by and between S&W of Las
Vegas, L.L.C. as "Borrower" and Morgan Stanley Dean Witter
Commercial Financial Services, Inc. as the "Lender" dated as
of October 25, 2002.

10.73 Second Amendment to Term Loan Agreement by and between S&W of
Las Vegas, L.L.C. as "Borrower" and Morgan Stanley Dean Witter
Commercial Financial Services, Inc. as the "Lender" dated as
of December 24, 2002.

10.74 Amendment to Term Loan Agreements by and between S&W of Las
Vegas, L.L.C. as "Borrower", The Smith & Wollensky Restaurant
Group, Inc. and Dallas S&W, L.P. as "Guarantors" and Morgan
Stanley Dean Witter Commercial Financial Services, Inc. as the
"Lender" dated as of August 20, 2003.

10.75 Amendment to Term Loan Agreements by and between S&W of Las
Vegas, L.L.C. as "Borrower", The Smith & Wollensky Restaurant
Group, Inc. and Dallas S&W, L.P. as "Guarantors" and Morgan
Stanley Dean Witter Commercial Financial Services, Inc. as the
"Lender" dated as of September 28, 2003.

31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes - Oxley Act of 2002.

31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes - Oxley Act of 2002.

32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

33